Final Results
Gulf Keystone Petroleum Ld
12 June 2006
12th June, 2006
GULF KEYSTONE PETROLEUM LTD
("Gulf Keystone" or the "Company")
PRELIMINARY RESULTS ANNOUNCEMENT
Gulf Keystone Petroleum Limited, an independent oil and gas exploration company
operating in the Republic of Algeria, today announces its preliminary results
for the period ending 31 December, 2005.
Highlights
• Drilling and workover operations on Block 126a resulted in a highly
successful well test on the GKS oil discovery and a potential oil discovery
on the GRJ structure.
• Commerciality formally declared on both the GKS and GKN oil discoveries,
development approval and a production licence expected shortly. SONATRACH
supporting exploration licence extension to allow completion of GRJ-2.
Extension subject to formal approval and gazetting.
• Award of eight new blocks onshore in Algeria, as Operator with 75% Working
Interest.
• Independent estimates of recoverable Resources within the new Hassi Ba
Bamou Perimeter and Block 129 contract areas total some 200 mmboe, with
further exploration potential of some 450 mmboe.
• Full review of strategic options for Algerian portfolio ongoing in
conjunction with the Algerian Authorities.
• Management team strengthened.
Todd Kozel, Chief Executive Officer of Gulf Keystone said:
"The key challenges for Gulf Keystone during 2006 are very clearly to secure
production and cash flow from the discoveries on Block 126a and to significantly
advance the exploration and appraisal of the newly acquired licences. Also Gulf
Keystone is now well positioned to focus on the further development of its
business and the expansion of its portfolio, exploiting what it considers to be
its particular competitive edge at the point of access for new opportunities in
both Algeria and selected areas of the Middle East and North Africa. We approach
this next phase in the company's development with considerable optimism."
Enquiries
Gulf Keystone Petroleum: 020 7514 1400
Todd Kozel, CEO
Bill Guest, President
Jon Cooper, Finance Director
Hoare Govett Limited: 020 7678 8000
Andrew Foster
Tristone Capital Limited: 020 7399 2470
Simon Ashby Rudd
Citigate Dewe Rogerson: 020 7638 9571
Media enquiries: Martin Jackson / George Cazenove
Analyst enquiries: Nina Soon
or visit: www.gulfkeystone.com
CHAIRMAN'S STATEMENT
The year has been one of strong operational focus as we have continued with the
drilling and testing of prospects and existing discoveries on Block 126a and
have begun a comprehensive programme of technical and commercial studies on the
major new acreage holdings acquired by Gulf Keystone Petroleum Limited ("the
Company" or "Gulf Keystone") in Algeria during 2005.
These varied activities have now confirmed that the Company has a portfolio of
assets with very significant oil and gas potential. A recent independent
assessment of the Company's reserves and resources carried out by RPS Energy
Limited (RPS), and discussed further in the Chief Executive's report, has
confirmed that the Company's newly expanded portfolio of assets contains
significant oil and gas exploration and development potential.
While the results of operational activities on Block 126a have been mixed, they
have added immeasurably to our understanding of the significant hydrocarbon
potential that exists in this geologically complex area. Commerciality has been
formally declared on the two oil discoveries, GKN and GKS, and a third potential
oil discovery has resulted from the drilling of well GRJ-2, which encountered
three potentially hydrocarbon bearing intervals, and a test programme is being
developed for this well.
Having fulfilled its work commitments on Block 126a, and following conclusion of
the Second Exploration and Evaluation Period of the licence in April of this
year, Gulf Keystone has decided to focus exclusively on bringing the GKS and GKN
oil fields into production, and on unlocking the productive potential of the GRJ
oil bearing structure. SONATRACH has notified the Company of its support for the
extension to the Block 126a exploration licence, which is necessary to enable
the Company to pursue further work on the GRJ field, however, the extension to
the contract still needs to be formally gazetted. The Company has relinquished
the remaining exploration acreage on the block.
In April 2005, Gulf Keystone was a highly successful bidder in the 6th Algerian
International Licencing Round, acquiring exploration and appraisal rights to six
additional onshore blocks under two separate contracts. A third contract,
covering the Ben Guecha Perimeter (Blocks 108 and 128b), also adjacent to the
Company's other Constantine Basin interests, was secured as a result of direct
negotiation with SONATRACH and the Algerian Ministry of Energy and Mines. This
contract has been signed by all relevant parties and we now await the formal
gazetting of this award.
These awards have increased Gulf Keystone's acreage holdings from one block
covering 5,830 sq km to nine blocks now covering some 27,400 sq km. The Company
has been awarded Operatorship of all eight new blocks and holds 75% of the
working interest with its partner SONATRACH holding the remaining 25% working
interest. The Company has already commenced detailed technical and commercial
studies on these new blocks with the intention of acquiring further 2D and 3D
seismic data, and commencing appraisal and workover activities on discoveries
already made on the licences, as soon as practicable.
I am delighted to report that Gulf Keystone has continued to strengthen
radically its management team by recently recruiting individuals onto the Board
and the Executive team with very significant international upstream experience
in the financial, commercial and technical areas in particular. In this regard,
Bill Guest took on the position of President of the Company in November 2005
while in March 2006 Jon Cooper joined as Finance Director for Gulf Keystone
Petroleum Limited and Iain Patrick joined as Director of Commercial and Legal
Affairs for Gulf Keystone Petroleum (UK) Limited. We very much welcome them on
board.
As the team expands and continues to build its reputation within Algeria as a
skilled and technically competent Operator and Partner, Gulf Keystone is now
increasingly well placed to concentrate on expanding its business development
strategy. Such a strategy will inevitably be focused, first and foremost, on
building its competitive position in Algeria. The Company is however, also
beginning to focus actively, in parallel, on other selected areas within the
North Africa and Middle East region where it considers that it has a competitive
edge at the point of access as a result of its existing regional relationships.
Finally, I am delighted to acknowledge the strong and highly collaborative
working relationship that the Company continues to enjoy in Algeria with its
host, the Ministry of Energy and Mines, and partner SONATRACH and we look
forward to building and developing these relationships further to our mutual
benefit. I remain however acutely aware of the need for us to continue to be
able to translate these excellent relationships into specific deliverables. We
are also conscious of the need to demonstrate the viability of, and growth
potential associated with the Company's strategy.
One of the key challenges that Gulf Keystone and other operators in Algeria have
faced during 2005 has been the increasing cost of and access to goods and
services. This obviously reflects the current state of the global service market
particularly in Algeria and has for example hindered the Company from
considering some of the more radical reservoir stimulation activities on Block
126a that it contemplated at the time of licence acquisition. The Company is
however taking important steps to ensure that those services required in support
of its future programme of activities within its expanded portfolio can be
accessed on a timely and cost effective basis.
I would like to thank all those employed by the Company, whether in Bermuda,
Algeria, London or elsewhere, for their significant efforts over the past year,
and I now very much look forward to being able to report progress towards
demonstrating the potential of, and crystallising the value from, the Company's
diverse portfolio of assets.
Roger Parsons
Non-executive Chairman
CHIEF EXECUTIVE OFFICER'S STATEMENT
I am pleased to be able to report on the activities of Gulf Keystone over the
past year.
On the operational side, significant focus has been placed on the drilling and
testing of prospects and existing discoveries on Block 126a and on the
maturation and finalisation of development plans for the GKS and GKN oil
discoveries. In parallel, a major technical and commercial effort has been
undertaken to increase our understanding of the hydrocarbon resource potential,
and economic potential, of the three further contract areas awarded in 2005, and
to progress plans for the further exploration and appraisal of these areas.
The Block 126a 2005 drilling campaign consisted of the drilling of two wells,
exploration well RTBW-1 and appraisal well GRJ-2, and the drilling of a
sidetrack to an existing well, GKS-3. The well workover campaign consisted of
the re-entry and stimulation of wells GKS-2 and GRJ-1. The results, which are
discussed in more detail below, were mixed but have enabled the Company to
progress its plans for the commercialisation of oil discoveries on the Block
126a and have added immeasurably to our understanding of this geologically
complex area. The above programme marks the completion of all work obligations
on Block 126a.
One of the key achievements of 2005 was the award of three additional contract
areas in Algeria. The areas awarded to Gulf Keystone include the Hassi Ba Hamou
(HBH) perimeter, containing 5 blocks and located in the Eastern Timimoun Basin
to the north of BP's In Salah field, and Blocks 108, 128b and 129, located in
the Constantine Basin. Preparation of exploration and appraisal plans for these
licences are well underway.
Gulf Keystone is Operator of, and holds 100% of the interest available to
foreign partners in, all of its Algerian licence interests. Given the rapid
expansion of its portfolio during the year, and ahead of the next round of
exploration and appraisal activity, the Company's recent focus has been firstly
on the full technical review and inventorisation of its portfolio of
discoveries, prospects and leads, secondly the potential introduction of
strategic partners to complement and accelerate its exploration and appraisal
efforts, and thirdly the expansion of its management team. I'm pleased to be
able to report good progress on a number of fronts.
With regard to the technical review of the portfolio, and of the newly awarded
licences in particular, RPS Energy Limited recently and independently estimated
that for the HBH perimeter and Block 129 alone, gross recoverable hydrocarbon
volumes for the licences total 201.7 million barrels of oil equivalent ("Best
Estimate" or Mean case). These resources include a significant gas discovery in
the HBH licence and certain oil discoveries in Block 129. Under the new AIM
guidelines, these volumes are categorised as "Contingent Resources" (being
existing discoveries of oil and gas that require further technical or commercial
evaluation).
In addition, RPS confirm in these two contract areas, and in the retained area
of Block 126a, the presence of 23 undrilled prospects and leads which, at the "
Best Estimate" (Mean) unrisked level, contain potential gross recoverable
reserves for the licences ("Prospective Resources") of 473.1 million barrels of
oil equivalent. On a risked basis, this equates to 70.8 mmboe. Further
discoveries and prospectivity have been recognised by SONATRACH and Gulf
Keystone in Blocks 108 and 128b and these are currently under review.
Block 126a
GKN/GKS development
Operational activity on the GKN and GKS discoveries included the workover of
well GKS-2 and the drilling of a sidetrack on well GKS-3. Well GKS-2, was
re-entered and stimulated. Production testing of the well resulted in a measured
flow rate of 4,586bopd and 4.61 million cubic feet of gas per day.
Well GKS-3 was originally drilled in 2003 and completed with a perforated liner.
The GKS-3 sidetrack, drilled in 2005, allowed further testing and acid
stimulation of the Ras Toumb and Cenomanian intervals. These intervals proved to
be tight and non-productive. The well was suspended pending evaluation of
further stimulation techniques.
Gulf Keystone has submitted a "Final Discovery Report" with a development plan
for the GKN field and has made an "Early Production Licence" application for the
GKS field. These discoveries are located in a geologically complex area, hence
the development of reserves will be phased - data from each phase being utilised
to optimise, and confirm the economic viability of, the subsequent phase. The
GKN field is already linked by a pipeline to production facilities at Ras Toumb,
and the GKS discovery well, GKS-2, is situated within 2.4 km of this pipeline.
Gulf Keystone is proposing to tie GKS-2 into the GKN pipeline, following a
capacity upgrade, and carry out extended well testing in order to assess the
ultimate recovery of the well and provide insight to the optimum mechanism for
accessing the remaining GKS field reserves. The oil recovered during the
extended well test will be marketed with the GKN production. The drilling of a
second development well on the GKN discovery, GKN-4, is planned as part of the
first phase of the GKN development, following receipt of a production licence,
as is the acquisition of a small (c. 150 sq km) 3D seismic survey. Approval for
the GKN/GKS development project was temporarily delayed due to the recent
introduction of legislation limiting the flaring of gas. However, the Company
has now submitted to SONATRACH a viable plan to utilise the associated gas
produced with the oil from both fields which is presently under active review.
The Company believes that development approval and a production licence will be
granted shortly.
GRJ Oil Discovery
Well GRJ-1, drilled in 2003, was re-entered and tested during 2005. However,
only small quantities of oil were recovered under test with no sustainable
production being achieved. This further illustrates the challenges that have
been experienced in Block 126a where widespread oil has been encountered but
sufficient connectivity between the wellbore and fractures within the reservoir
has not always been achievable from initial operations. The well was suspended
pending evaluation of various options for stimulating the reservoir and
achieving the necessary connectivity.
Data from well GRJ-2, drilled in 2005, which was analysed by third party
consultants, indicated that there are three separate potential reservoir
intervals which may have the potential to contain hydrocarbons. Given the poor
productivity of some previous wells, it was decided to defer testing of this
well until the optimal test programme could be designed and agreed between
SONATRACH and Gulf Keystone and suitable equipment could be made available in
Algeria. Progress is being made towards finalising a testing strategy.
The Company has applied for an 8 month licence extension from the Algerian
authorities in respect of the GRJ discovery in order to complete the testing of
well GRJ-2 which, in the case of success, the Company expects would be the
subject of a production licence application.
Hassi Ba Hamou perimeter (Blocks 317b, 322b, 347b, 348, 349b)
The HBH perimeter, covering an area of 18,380 sq km, contains one existing gas
field, HBH, confirmed by the drilling of three wells by SONATRACH and a number
of undrilled leads and prospects.
The initial seismic and well data set acquired by the Company in connection with
the licence award included data relating to the HBH-1 discovery well and a
portion of the 4,069 km of 2D seismic data previously acquired by SONATRACH.
Since then, the Company has acquired from SONATRACH a substantially enhanced
data set, including important log and well test data from a successful appraisal
well HBH-3 and a substantial quantity of additional seismic data.
This has enabled the Company to carry out a full technical and economic review
of the contract area and identify a potential gas resource base which is
materially larger than was identifiable at the time of licence award. RPS, as
part of their recent independent review of Gulf Keystone's reserves and
resources, estimate that the HBH Field contains recoverable gas reserves of 995
bcf. (These are classified as "Contingent Resources", pending commercialization
of gas, and represent the "Best Estimate" or Mean case). RPS also confirmed a
minimum of four undrilled leads and prospects containing a further potential
1,935 bcf in place Mean unrisked case). The Company's ongoing technical analysis
of the HBH perimeter is continuing to identify significant additional
hydrocarbon prospectively.
Gulf Keystone intends to appraise the existing HBH discovery and drill two
exploration wells during the first three year phase of the contract. It had, in
addition, intended to acquire 100 sq km of 3D seismic and 400 km of 2D seismic
as part of this initial programme. However, given the significantly enhanced
prospectivity of the HBH perimeter, a potential increase in that programme to
some 2,000 km of 2D seismic and 500 sq km of 3D seismic during this initial
phase, is under consideration.
Ben Guecha (Blocks 108/128b)
The primary focus of SONATRACH and Gulf Keystone (the "JV partners") on the Ben
Guecha permit will be the further development of the existing Ras Toumb oil
field and the exploration for additional oil and gas reserves. SONATRACH's
interpretation of its previously acquired 4,457 km of 2D seismic on the permit
identified 7 additional prospects and leads, one of which, OSD, SONATRACH
completed the drilling and logging of an exploration well and temporarily
abandoned the well awaiting testing equipment. The JV partners committed to
drill 2 wells on the permit during the initial 3 year phase of the licence, as a
minimum work program.
The Company acquired 156 sq km of 3D data over the greater Ras Toumb area in
2005 and this, together with an enhanced seismic and well data base since
received from SONATRACH, has formed the basis of an ongoing full technical
review of the contract area, the initial results of which have confirmed the
prospectivity of the area.
Further to the signing of the Production Sharing contract in 2005, these
licences are yet to be ratified by being published in the Algerian official
gazette. While the Company has already commenced a comprehensive work programme
on the licence, the first official three year phase of the licence will not
commence until the contract is ratified.
Bottena perimeter (Block 129)
Covering an area of 4,368 sq km, the Bottena perimeter is in the South
Constantine Basin, adjacent to Block 126a and extending towards the Tunisian
border. The licence area contains the Hassi El Kerma (HEK) oil discovery and
Djebel Foua gas discovery. SONATRACH recently drilled two additional structures
on the permit area, Djebel Darmoun (DDN) (2000) and Hanchir Baaziz (HCZ) (2002)
both of which confirmed the presence of oil.
Gulf Keystone currently intends to appraise the discoveries HEK and DDN, drill
one exploration well and acquire additional 2D and 3D seismic data on the
Bottena Perimeter. In addition, Gulf Keystone is considering processing and
interpreting the 412 sq km 3D seismic survey that was acquired by SONATRACH over
the DDN discovery in July 2005. It is presently undertaking a full technical
review of the licence to firm up the prospectivity.
Financial Results
The Company reports a loss after taxation of $40.8 million (2004: $2.4 million)
for the period. This loss is after an impairment charge for Block 126a of $35.1
million. The impairment under IFRS 6 was triggered for the Block 126a's group
of cash generating units by the transfer of $24.8 million relating to the GKN
and GKS fields from intangible fixed assets to tangible fixed assets, and
reflects the decision of the Company not to apply for an extension to the Block
126a licence area outside of GKN, GKS and GRJ-2.
Capital Expenditure on exploration and evaluation activities was $47 million.
At the end of the year the Company had $51.4 million in cash of which $34.7
million was pledged against the issue of bank guarantees to SONATRACH.
Outlook
The key challenges for Gulf Keystone during 2006 are very clearly to secure
production and cash flow from Block 126a and to radically advance the
exploration and appraisal of its newly acquired licences. The Company is now in
position to focus efforts on the further development of its business and the
expansion of its portfolio, exploiting what it considers to be its particular
competitive edge at the point of access for new opportunities in both Algeria
and other selected areas of the Middle East and North Africa. We approach this
next phase in the Company's development with considerable optimism.
Todd Kozel
Chief Executive Officer
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005
Restated
NOTES 2005 2004
$'000 $'000
Continuing Operations
Revenue - -
Impairment provision 3 (35,145) -
General and administrative expenses (7,325) (4,197)
Share option expense (394) (108)
Loss from operations (42,864) (4,305)
Investment income 2,213 1,928
Loss before tax (40,651) (2,377)
Tax expense (135) -
Loss after tax for the year (40,786) (2,377)
Loss per share (cents)
Basic and diluted 1 (16.08) (1.72)
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2005
NOTES 2005 Restated
2004
$'000 $'000
ASSETS
Non-current assets
Property, plant and equipment 2 25,594 83
Intangible assets 3 28,651 41,708
54,245 41,791
Current assets
Inventories 3,472 2,485
Trade and other receivables 3,386 425
Cash and cash equivalents 51,439 89,882
58,297 92,792
Total assets 112,542 134,583
LIABILITIES
Current liabilities
Trade and other payables 20,291 4,068
Tax liabilities 135 -
Provisions 2,050
Total liabilities 22,476 4,068
Net assets 90,066 130,515
EQUITY
Share capital 1,638 1,626
Share premium account 135,349 135,349
Convertible warrants - 12
Share option charge reserve 502 108
Exchange translation reserve (57) -
Accumulated losses (47,366) (6,580)
Total equity 90,066 130,515
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005
Attributable to equity holders of the Group
Exchange
Share Share Share option Convertible Accumulated Translation Total
Capital premium reserve warrants Deficit Reserve Equity
$'000 $'000 $'000 $'000 $'000 $'000 $'000
Balance at 1 January 2004 24,493 - - - (5,578) - 18,915
24,493 - - - (5,578) - 18,915
- Prior year adjustment re - - - - 1,375 - 1,375
overheads capitalised (see
note 7)
- as restated 24,493 - - - (4,203) - 20,290
Preferred shares private 13,072 - - - - - 13,072
placement
Share conversion and issue (35,939) 135,349 - - - - 99,410
Warrants subscribed - - - 12 - - 12
Net loss for the year - - - - (2,377) - (2,377)
Balance at 1 January 2005 1,626 135,349 - 12 (7,837) - 129,151
- Prior year adjustment re - - - - 1,363 - 1,363
overheads capitalised (see
note 7)
- Prior period adjustment re - - 108 - (108) - -
share option expense
- as restated 1,626 135,349 108 12 (6,580) - 130,515
Employee share option expense - - 394 - - - 394
Exchange differences arising on - - - - - (57) (57)
translation of overseas
operations
Exercise of warrants 12 - - (12) - - -
Net loss for the year - - - - (40,786) - (40,786)
Balance at 31 December 2005 1,638 135,349 502 - (47,366) (57) 90,066
The exchange rate used in the currency revaluation at year end was British Pound
= 1.7361 US Dollar.
CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005
Restated
NOTES 2005 2004
£'000 £'000
OPERATING ACTIVITIES
Cash used in operations 4 (2,132) (5,852)
Interest received 2,213 1,928
NET CASH GENERATED/(USED) IN OPERATING ACTIVITIES 81 (3,923)
INVESTING ACTIVITIES
Purchase of intangible assets (37,663) (25,620)
Purchase of property, plant and equipment (804) (43)
NET CASH USED IN INVESTING ACTIVITIES (38,467) (25,663)
FINANCING ACTIVITIES
Proceeds on issue of share capital - 112,494
NET CASH USED IN FINANCING ACTIVITIES - 112,494
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (38,386) 82,907
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 89,882 6,975
Effect of foreign exchange rate changes (57) -
CASH AND CASH EQUIVALENTS AT END OF YEAR
Bank balances and cash 51,439 89,882
CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial information for the year ended 31 December 2005 has not been
audited and does not constitute the Company's statutory financial statements.
The preliminary report was approved by the Board on 12 June 2006. The statutory
accounts for the year ended 31 December 2005 have not been reported on by the
Company's auditors. They will be circulated to the shareholders in June 2006 and
the Annual General Meeting is arranged to take place on 15 July 2006. The
comparative results for the year ended 31 December 2004 are based on the audited
financial statements which contained an unqualified audit opinion.
Basis of accounting
The company is incorporated in Bermuda and it is quoted on the Alternative
Investment Market of the London Stock Exchange.
The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS") for the first time. The disclosures
required by IFRS 1 concerning the transition from UK GAAP to IFRS are given in
note 6.
The financial statements have been prepared under the historical cost accounting
rules and on a going concern basis. In common with many exploration companies,
the Group raises finance for its exploration and appraisal activities in
discrete tranches to finance its activities for limited periods. Further
funding is raised as and when required. When any of the Group's projects move
to the development stage, specific financing may be required to enable
development to take place. The principal accounting policies adopted are set out
below.
At the date of authorisation of these financial statements the following
Standards and Interpretations which have not been applied in these financial
statements were in issue but not yet effective:
IFRS 7 Financial instruments: Disclosures; and the related amendment to
IAS 1 on capital disclosures
IFRIC 4 Determining whether an Arrangement contains a Lease
IFRIC 5 Rights to Interest Arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
IFRIC 8 Scope of IFRS 2 Share -based Payment
IFRIC 9 Reassessment of Embedded Derivatives
The Directors anticipate that the adoption of these Standards and
Interpretations in future periods will have no material impact on the financial
statements of the Group when the relevant standards come into effect for periods
commencing on or after 1 January 2007.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and enterprises controlled by the Company (its subsidiaries) made up
to 31 December each year. The Group uses the purchase method of accounting for
the acquisition of subsidiaries.
The results of subsidiaries acquired or disposed of during the year are included
in the consolidated income statement from the effective date of acquisition or
up to the effective date of disposal, as appropriate. Where necessary,
adjustments are made to the financial statements of subsidiaries to bring the
accounting policies used into line with those used by other members of the
Group.
All intra-Group transactions, balances, and unrealised gains on transactions
between Group companies are eliminated on consolidation. Unrealised losses are
also eliminated unless the transaction provides evidence of an impairment of the
asset transferred.
Leasing
Rentals payable under operating leases are charged to income on a straight-line
basis over the term of the relevant lease.
Benefits received and receivable as an incentive to enter into an operating
lease are also spread on a straight line basis over the shorter of the period to
the next rent review date and the lease term.
Foreign currencies
Transactions in currencies other than US Dollars are recorded at the rates of
exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies
are retranslated at the rates prevailing on the balance sheet date. Non-monetary
assets and liabilities carried at fair value that are denominated in foreign
currencies are translated at the rates prevailing at the date when the fair
value was determined. Gains and losses arising on retranslation are included in
the income statement for the period.
On consolidation, the assets and liabilities of the Group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expense items are translated at the average exchange rates for each month in
the period. Exchange differences arising, if any, are classified as equity and
transferred to the Group's translation reserve. Such translation differences are
recognised as income or as expenses in the period in which the operation is
disposed of.
The functional and presentation currency of the company is dollars as the
majority of the Group's transactions are transacted in this currency.
Taxation
Under current Bermuda laws, the Group is not required to pay taxes in Bermuda on
either income or capital gains. The Group has received an undertaking from the
Minister of Finance in Bermuda exempting it from any such taxes at least until
the year 2016.
Algeria currently imposes no taxes on corporate income or capital gains
The tax currently payable is based on taxable profit for the year earned in the
United Kingdom by the Group's subsidiary. Taxable profit differs from net
profit as reported in the income statement because it excludes items of income
or expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Group's liability for current
tax is calculated by using tax rates that have been enacted or substantively
enacted by the balance sheet date.
There is no deferred tax provided as there are no material timing differences
which give rise to such a balance.
Property, plant and equipment other than oil and gas interests
Property, plant and equipment are stated at historical cost. Depreciation is
provided at rates calculated to write each asset down to its estimated residual
value evenly over its expected useful life as follows:-
Fixtures and equipment - 20% straight line
Intangible assets other than oil and gas
Intangible assets, other than oil and gas assets, have finite useful lives and
are measured at cost and amortised over their expected useful economic lives as
follows:-
Computer software - 33% straight line
Intangible and tangible non current assets - oil and gas interests
The Group adopts the full cost method of accounting for its oil and gas
interests. Under the full cost method of accounting all costs relating to the
exploration for and development of oil and gas interests, whether productive or
not, are accumulated and capitalised as non-current assets. These costs, which
are initially classified as intangible non-current assets during the exploration
and evaluation phase, are only carried forward to the extent that they are
expected to be recouped through the successful development of an area or where
activities in an area have not yet reached a stage which permits reasonable
assessment of the existence of economically recoverable reserves.
Costs dealt with in this way include seismic data, licence acquisition costs,
technical work, exploration and appraisal drilling, general technical support
and directly attributable administrative and overhead costs.
In 2003 and 2004 not all of the directly attributable administrative and
overhead costs were capitalised in line with the Group's policy. In order to
rectify this, these costs have been capitalised and the opening balances
restated. These adjustments are set out in note 7.
Costs are transferred to depreciable pools within property, plant and equipment
upon declaration of commerciality or upon cessation of exploration on each
license and amortised over the life of the area according to the rate of
depletion of the economically recoverable costs. Any proceeds arising from the
sale or farm-out of assets are deducted from the relevant cost pool.
Depreciation and depletion of costs in depreciable pools is provided under the
unit of production method which uses the estimated commercial reserves in the
cost pool and the sum of the total costs in the pool and any further anticipated
costs to develop such reserves.
Impairment of tangible and intangible non-current assets
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any). Where the asset does not generate cash
flows that are independent from other assets, the Group estimates the
recoverable amount of the cash-generating unit to which the asset belongs. An
intangible asset with an indefinite useful life is tested for impairment
annually and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset for which the estimates of future cash flows have been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment loss
is recognised as an expense immediately, unless the relevant asset is carried at
a revalued amount, in which case the impairment loss is treated as a revaluation
decrease.
Inventories
Inventories relates to materials acquired for use in exploration activities.
These are valued at the lower of cost and net realisable value.
Warrants
Proceeds in respect of convertible warrants subscribed are shown as a reserve
and upon issue of the shares, the proceeds are transferred to share capital.
Financial instruments
The Group's financial instruments comprise cash together with various items such
as other receivables and trade payables etc, which arise directly from its
operations. The main purpose of these financial instruments is to provide
working capital
Financial assets and financial liabilities are recognised on the Group's balance
sheet when the Group has become a party to the contractual provisions of the
instrument.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal
value as reduced by appropriate allowances for estimated irrecoverable amounts.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into. An equity instrument is
any contract that evidences a residual interest in the assets of the Group after
deducting all of its liabilities.
Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including premiums payable
on settlement or redemption, are accounted for on an accrual basis and are added
to the carrying amount of the instrument to the extent that they are not settled
in the period in which they arise.
Trade payables
Trade payables are not interest bearing and are stated at their nominal value.
Equity instruments
Equity instruments issued by the company are recorded at the proceeds received,
net of direct issue costs.
Provisions
Provisions are recognised when the Group has a present obligation as a result of
a past event which it is probable will result in an outflow of economic benefits
that can be reliably estimated.
Decommissioning provision
The decommissioning provision represents management's best estimate of the
Group's discounted liability when restoring the sites of drilled wells to their
original status.
Share-based payments
The Group has applied the requirements of IFRS 2 to share option schemes
allowing certain employees within the Group to acquire shares of the company.
For all grants of share options, the fair value as at the date of grant is
calculated using an appropriate option pricing model and the corresponding
expense is recognised over the expected life of the option.
Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.
Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting
accounting estimates and assumptions will, by definition, seldom equal related
actual results. The estimates and assumptions that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are discussed below.
Abandonment
The Group has estimated that abandonment costs for wells will be $410,000 per
well. It has provided for this amount for GKS-3, RDL-1, GRJ-1, GRJ-2 and GKS-3.
The carrying amount in the balance sheet as at 31 December 2005 is $2,050,000.
Impairment Review of GKN and GKS
The Group employed a modelling specialist, PWX LTD, to calculate the net present
value of GKN and GKS based on, and with sensitivities around, a gross production
profile of 4 mbpd, an oil price of $60bbl and a discount rate of 10%. The
positive net present value from this model exceeded the carrying value as at 31
December 2005 of $24.8 million which was, therefore, transferred from intangible
to tangible assets.
NOTES
1 LOSS PER SHARE
The calculation of the basic and diluted earnings per share is based on the following data:
Earnings 2005 2004
$'000 $'000
Loss for the purposes of basic and diluted loss per share (40,786) (2,377)
Number of shares
Weighted average number of ordinary shares for the purposes of 253,677,757 138,101,276
basic and diluted loss per share
There is no dilutive effect from the options or warrants issued by the
company.
2 PROPERTY, PLANT AND EQUIPMENT Restated Restated
Oil & Gas Fixtures &
Properties Equipment Total
$'000 $'000 $'000
At 1 January 2004
Cost - 73 73
- Prior year adjustment re overheads 3 3
capitalised (see note 7)
-
- As restated - 76 76
Accumulated depreciation - (24) (24)
Net book value - 52 52
Year ended 31 December 2004
Opening net book value - 52 52
Additions - 43 43
Depreciation charge - (12) (12)
Closing net book value - 83 83
At 31 December 2004
Cost - 119 119
Accumulated depreciation - (36) (36)
Net book value - 83 83
Year ended 31 December 2005
Opening net book value - 83 83
Additions - 804 804
Transfer from intangible assets 24,849 - 24,849
Depreciation charge - (142) (142)
Closing net book value 24,849 745 25,594
At 31 December 2005
Cost 24,849 923 25,772
Accumulated depreciation - (178) (178)
Net book value 24,849 745 25,594
3 INTANGIBLE ASSETS Restated
Exploration & Computer Restated
evaluation costs software Total
$'000 $'000 $'000
At 1 January 2004
Cost and net book value 22,393 - 22,393
- Prior year adjustment re overheads 1,375 - 1,375
capitalised (see note 7)
- As restated 23,768 - 23,768
Year ended 31 December 2004
Opening net book value 23,768 - 23,768
Additions 17,940 - 17,940
Closing net book value 41,708 - 41,708
At 31 December 2004
Cost and net book value 41,708 - 41,708
Year ended 31 December 2005
Opening net book value 41,708 - 41,708
Additions 46,808 156 46,964
Transferred to tangible assets (24,849) - (24,849)
Impairment write off (35,145) - (35,145)
Amortisation charge - (27) (27)
Closing net book value 28,522 129 28,651
At 31 December 2005
Cost 63,667 156 63,823
Accumulated amortisation (35,145) (27) (35,172)
Net book value 28,522 129 28,651
$24.8 million was transferred from oil & gas exploration and evaluation costs to
oil & gas properties within property, plant and equipment during the year. This
transfer was triggered by the SONATRACH and Gulf Keystone Petroleum Limited
joint venture management committee i) declaring commerciality of the GKN field
and sending a recommendation via SONATRACH to the Ministry of Energy and Mining
in Algeria endorsing a production license; ii) the anticipated declaration of
commerciality of GKS and subsequent recommendation via SONATRACH to the Ministry
of Energy and Mining in Algeria for the award of an early production license.
This transfer, together with the expiry of the exploration license from Block
126a and the Groups decision only to focus on GKN, GKS and GRJ fields within
Block 126a has triggered an impairment test under IFRS 6 and IAS 36 for Block
126a's Group of cash generating units. $35.1million has been written off
intangible fixed assets as a result of this impairment test in relation to the
exploration activities on OGZ, RDL and RTBW.
The amortisation charge of $27,000 has been included in general and
administrative expenses.
RECONCILIATION OF LOSS FROM OPERATIONS TO NET CASH USED IN 2005 2004
OPERATING ACTIVITIES
4 $'000 $'000
Loss from operations (42,864) (4,305)
Adjustments for
Depreciation of property, plant & equipment 142 12
Amortisation of intangibles 27
Impairment of intangibles 35,145
Share based payment expense 394 108
Increase in inventories (987) (1,616)
Increase in provision 2,050
Increase in receivables (2,961) (361)
Increase in payables 6,922 310
Cash used in operations (2,132) (5,852)
5 BANK GUARANTEES
As part of the contractual terms of the Algerian contracts, the Group has given
bank guarantees to SONATRACH of $34.7 million. These are cash backed guarantees
which effectively reduce the free cash available that the Group has on its
balance sheet. That is $6 million for the Bottena ("129 Contract") work
programme, $15.6 million for the Ben Guecha ("108/128b Contract") work programme
and $13.1 million for the Hassi Be Hamou (Blocks 317b, 322b3, 347b, 348 and
349b) work programme. These guarantees are against the exploration and
evaluation programmes stipulated in the contracts and are reduced as the work
programmes are completed.
6 EXPLANATION OF TRANSITION TO IFRS
As required by IFRS 1, the impact of the transition from UK GAAP to IFRS is
explained below.
The accounting policies set out above have been applied consistently to all
periods presented in this financial information and in preparing an opening IFRS
balance sheet at 1 January 2004 for the purposes of the transition to IFRS.
IAS 1 - Presentation of Financial Statements
The form and presentation of the UK GAAP financial statements has been changed
to be in compliance with IAS 1.
IFRS 2 - Share Based Payments
Under IFRS 2, share awards are measured at fair value at grant date and
recognised as an expense to the income statement over the expected term. The
fair value of the incentives granted is measured using a stochastic model. The
impact of this standard on the financial statements of the Group is a $108,000
charge to the year ended 31 December 2004 income statement and an equivalent
increase in share option reserve.
IAS 7 - Cash Flow Statements
The IFRS Cash Flow Statement, prepared under IAS 7, presents cash flows in three
categories; cash flows from operating activities, cash flows from investing
activities and cash flows from financing activities. Other than the
reclassification of cash flow into the new disclosure categories, there are no
significant differences between the Group's Cash Flow Statement under UK GAAP
and IFRS. Consequently, no cash flow reconciliations are provided. Purchases
of tangible fixed assets under UK GAAP have been reclassified to purchases of
intangible assets and purchases of property, plant and equipment under IFRS.
Details of the adjustments to the Group's financial performance for the year
ended 31 December 2004 are set out in the following tables:
Restated IFRS 2 Share Restated
UK GAAP based payment under IFRS
$'000 $'000 $'000
Administrative expenses (4,197) - (4,197)
Share option expense - (108) (108)
Loss from operations (4,197) (108) (4,305)
Investment income 1,928 - 1,928
Loss before tax (2,269) (108) (2,377)
Tax expense - - -
Loss after tax for the year (2,269) (108) (2,377)
Basic and diluted loss per share 1.6c 1.7c
Restated IFRS 2 Share Restated
UK GAAP based payment under IFRS
$'000 $'000 $'000
ASSETS
Non-current assets
Property, plant and equipment 83 - 83
Intangible assets 41,708 - 41,708
41,791 - 41,791
Current assets
Inventories 2,485 - 2,485
Trade and other receivables 425 - 425
Cash and cash equivalents 89,882 - 89,882
92,792 - 92,792
Total ASSETS 134,583 - 134,583
LIABILITIES
Current liabilities
Trade and other payables 4,068 - 4,068
TOTAL LIABILITIES 4,068 - 4,068
Net assets 130,515 - 130,515
EQUITY
Share capital 1,626 - 1,626
Share premium 135,349 - 135,349
Other reserves 12 - 12
Share options charge reserve - 108 108
Accumulated losses (6,472) (108) (6,580)
Total equity 130,515 - 130,515
The transition to IFRS has had no effect on cash flow.
The UK GAAP figures have been restated for the prior year adjustment per note 7.
7 EXPLANATION OF RETROSPECTIVE CHANGES UNDER IAS 8
In 2003 and 2004 not all attributable administrative and overhead costs were
capitalised according to the Group's policy. The 2004 financial statements have
been restated to correct this. The effect of the restatement on those financial
statements is summarised below.
Effect on 2004 $'000
Increase in intangibles 1,360
Increase in tangibles 3
Decrease in general and administration expense 1,363
Decrease in loss before tax 1,363
Decrease in loss per share 0.98
Effect on period prior to 2004 $'000
Increase in intangibles 1,375
Decrease in general and administration expense 1,375
Decrease in loss before tax 1,375
Decrease in loss per share 1.53
8 POST BALANCE SHEET EVENT
On 9 June 2006 the Group signed loan agreements with GIBCA Limited and Falcon
Partners Trust, both related parties, to provide an unsecured debt facility in
aggregate of $5 million at an interest rate of 7% and for a term of 12 months.
Full accounts are due to be posted to Shareholders on Friday 16th June, 2006 and
will be available at the Company's registered office Canon's Court, 22 Victoria
Street, Hamilton, HM12, Bermuda and on the Company's website
(www.gulfkeystone.com)
The Annual General Meeting is due to be held at the Company's Algerian office on
15th July, 2006 at 12 noon.
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